By Leika Kihara

WASHINGTON (Reuters) – The Bank of Japan is likely to delay further interest rate hikes due to uncertainty caused by U.S. tariffs, according to Nada Choueiri, deputy director of the IMF’s Asia Pacific Department.

The uncertainty surrounding U.S. tariffs and international responses could weaken business sentiment and hinder wage growth, Choueiri noted. Although the IMF predicts Japan’s inflation will eventually reach the BOJ’s 2% target, this is now expected to occur in 2027 instead of 2026.

Choueiri stated, “Many companies are likely hesitant about continuing their investment plans, waiting for clarity on future developments, which in turn is delaying investment decisions.”

If global conditions do not improve, the BOJ may need to postpone interest rate increases or maintain current levels of accommodation for a longer period. Analysts surveyed by Reuters expect that the BOJ will hold rates steady through June, with a slight majority anticipating a 25-basis-point hike next quarter.

The IMF modified its predictions for Japan’s economic growth, now forecasting an expansion of 0.6% in both 2025 and 2026, lowering expectations set earlier in the year. Choueiri mentioned that the current balance of risks leans towards downside challenges for growth and inflation due to potential impacts from higher U.S. tariffs.

In January, the BOJ increased its short-term interest rate to 0.5% after ending a decade-long stimulus program, believing the economy was close to achieving sustainable 2% inflation. However, U.S. tariffs have complicated future rate decisions. If domestic demand falls significantly, Choueiri indicated that the BOJ might need to consider increasing accommodation rather than continuing with rate hikes.

SAFE-HAVEN CURRENCY

President Trump has placed tariffs of 24% on Japanese exports, but most have been temporarily paused until early July. Current tariffs include a 10% universal rate and a 25% duty on cars, which could negatively impact Japan’s economy.

In response to rising living costs and tariff concerns, Prime Minister Shigeru Ishiba announced initiatives to lower gasoline prices and provide subsidies for electricity. Some lawmakers are advocating for temporary sales tax cuts to ease household burdens.

However, Choueiri expressed IMF concerns over these fiscal measures, stating they could jeopardize Japan’s long-term fiscal stability. She emphasized that while targeted support may be necessary if the economy suffers from tariffs, it must be time-bound and precisely aimed.

Choueiri reiterated the need for Japan to eventually raise the sales tax rate to manage its substantial public debt. Cuts made now would only necessitate larger efforts in the future.

The yen has recently strengthened against the dollar, seen as a safe-haven currency due to Japan’s economic stability. Choueiri affirmed that Japan’s authorities are committed to a flexible exchange-rate regime, which helps the economy adjust and absorb shocks gracefully.